Articles by Brent Skorup

Brent is a research fellow with the Technology Policy Program at the Mercatus Center at GMU. He has an economics degree from Wheaton College and a law degree from George Mason University. Opinions are his own.

Some recent tech news provides insight into the trajectory of broadband and television markets. These stories also indicate a poor prognosis for a net neutrality. Political and ISP opposition to new rules aside (which is substantial), even net neutrality proponents point out that “neutrality” is difficult to define and even harder to implement. Now that the line between “Internet video” and “television” delivered via Internet Protocol (IP) is increasingly blurring, net neutrality goals are suffering from mission creep.

First, there was the announcement that Netflix, like many large content companies, was entering into a paid peering agreement with Comcast, prompting a complaint from Netflix CEO Reed Hastings who argued that ISPs have too much leverage in negotiating these interconnection deals.

Interconnection and managed services are generally not considered net neutrality issues. They are not “loopholes.” They were expressly exempted from the FCC’s 2010 (now-defunct) rules. However, net neutrality proponents are attempting to bring interconnection and managed services to the FCC’s attention as the FCC crafts new net neutrality rules. Net neutrality proponents have an uphill battle already, and the following trends won’t help. Continue reading →

The Mercatus Center at George Mason University has released a new working paper by Daniel A. Lyons, professor at Boston College Law School, entitled “Innovations in Mobile Broadband Pricing.”

In 2010, the FCC passed net neutrality rules for mobile carriers and ISPs that included a “no blocking” provision (since struck down in FCC v. Verizon). The FCC prohibited mobile carriers from blocking Internet content and promised to scrutinize carriers’ non-standard pricing decisions. These broad regulations had a predictable chilling effect on firms trying new business models. For instance, Lyons describes how MetroPCS was hit with a net neutrality complaint because it allowed YouTube but not other video streaming sites on its budget LTE plan (something I’ve written on). Some critics also allege that AT&T’s Sponsored Data program is a net neutrality violation.

In his paper, Lyons explains that the FCC might still regulate mobile networks but advises against a one-size-fits-all net neutrality approach. Instead, he encourages regulatory humility in order to promote investment in mobile networks and devices and to allow new business models. For support, he points out that several developing and rich countries have permitted commercial arrangements between content companies and carriers that arguably violate principles of net neutrality. Lyons makes the persuasive argument that these “non-neutral” service bundles and pricing decisions on the whole, rather than harming consumers, expand online access and ease non-connected populations into the Internet Age. As Lyons says,

The wide range of successful wireless innovations and partnerships at the international level should prompt U.S. regulators to rethink their commitment to a rigid set of rules that limit flexibility in American broadband markets. This should be especially true in the wireless broadband space, where complex technical considerations, rapid change, and robust competition make for anything but a stable and predictable business environment.

Further,

In the rapidly changing world of information technology, it is sometimes easy to forget that experimental new pricing models can be just as innovative as new technological developments. By offering new and different pricing models, companies can provide better value to consumers or identify niche segments that are not well-served by dominant pricing strategies.

Despite the January 2014 court decision striking down the FCC’s net neutrality rules, it’s an issue that hasn’t died. Lyons’ research provides support for the position that a fixation on enforcing net neutrality, however defined, distracts policymakers from serious discussion of how to expand online access. Rules should be written with consumers and competition in mind. Wired ISPs get the lion’s share of scholars’ attention when discussing net neutrality. In an increasingly wireless world, Lyon’s paper provides important research to guide future US policies.

Google’s announcement this week of plans to expand to dozens of more cities got me thinking about the broadband market and some parallels to transportation markets. Taxi cab and broadband companies are seeing business plans undermined with the emergence of nimble Silicon Valley firms–Uber and Google Fiber, respectively.

The incumbent operators in both cases were subject to costly regulatory obligations in the past but in return they were given some protection from competitors. The taxi medallion system and local cable franchise requirements made new entry difficult. Uber and Google have managed to break into the market through popular innovations, the persistence to work with local regulators, and motivated supporters. Now, in both industries, localities are considering forbearing from regulations and welcoming a competitor that poses an economic threat to the existing operators.

Notably, Google Fiber will not be subject to the extensive build-out requirements imposed on cable companies who typically built their networks according to local franchise agreements in the 1970s and 1980s. Google, in contrast, generally does substantial market research to see if there is an adequate uptake rate among households in particular areas. Neighborhoods that have sufficient interest in Google Fiber become Fiberhoods.

Similarly, companies like Uber and Lyft are exempted from many of the regulations governing taxis. Taxi rates are regulated and drivers have little discretion in deciding who to transport, for instance. Uber and Lyft drivers, in contrast, are not price-regulated and can allow rates to rise and fall with demand. Further, Uber and Lyft have a two-way rating system: drivers rate passengers and passengers rate drivers via smartphone apps. This innovation lowers costs and improves safety: the rider who throws up in cars after bar-hopping, who verbally or physically abuses drivers (one Chicago cab driver told me he was held up at gunpoint several times per year), or who is constantly late will eventually have a hard time hailing an Uber or Lyft. The ratings system naturally forces out expensive riders (and ill-tempered drivers).

Interestingly, support and opposition for Uber and Google Fiber cuts across partisan lines (and across households–my wife, after hearing my argument, is not as sanguine about these upstarts). Because these companies upset long-held expectations, express or implied, strong opposition remains. Nevertheless, states and localities should welcome the rapid expansion of both Uber and Google Fiber.

The taxi registration systems and the cable franchise agreements were major regulatory mistakes. Local regulators should reduce regulations for all similarly-situated competitors and resist the temptation to remedy past errors with more distortions. Of course, there is a decades-long debate about when deregulation turns into subsidies, and this conversation applies to Uber and Google Fiber.

That debate is important, but regulators and policymakers should take every chance to roll back the rules of the past–not layer on more mandates in an ill-conceived attempt to “level the playing field.” Transportation and broadband markets are changing for the better with more competition and localities should generally stand aside.

On Saturday, C-SPAN aired a segment of The Communicators featuring me and Free Press’ Chance Williams. In the 30-minute segment, Chance and I discussed the future of net neutrality now that the FCC’s Open Internet rules are vacated. You can see the taping here or below.

In December, Reps. Upton and Walden announced that they intend to update the Communications Act, which saw its last major revision in 1996. Today marks the deadline to submit initial comments regarding updating the Act. Below is my submission, which includes reference to a Mercatus paper by Raymond Gifford analyzing the Digital Age Communications (DACA) reports. These bipartisan reports would largely replace and reform our deficient communications laws.

Dear Chairman Upton,

As you and Rep. Walden recently acknowledged, U.S. communications law needs updating to remove accumulated regulatory excess and to strengthen market forces. When the 1934 Communications Act was passed, there was a national monopoly telephone provider and Congress’s understanding of radio spectrum physics was rudimentary. Chief among the Communication Act’s many flaws was giving the Federal Communication Commission authority to regulate wired and wireless communications according to “public interest, convenience, and necessity,” an amorphous standard that has been frequently abused. If delegating this expansive grant of discretion to the FCC was ever sensible, it clearly no longer is. Today, eight decades later, with competition between video, telephone, and Internet providers taking place over wired and wireless networks, the public interest standard simply invites costly rent-seeking and stifles technologies and business opportunities.

Like an old cottage receiving several massive additions spanning decades by different clumsy architects, communications law is a disorganized and dilapidated structure that should be razed and reconstituted. As new technologies emerged since the 1930s—broadcast television, cable, satellite, mobile phones, the Internet—and upended existing regulated businesses, the FCC and Congress layered on new rules attempting to mitigate the distortions.

Congressional attempts at reforming communications laws have appeared regularly ever since the 1996 amendments. During the last such attempt, in 2011, the Mercatus Center released a study discussing and summarizing a model for communications law reform known as the Digital Age Communications Act (DACA). That model legislation—consisting of five reports released in 2005 and 2006—came from the bipartisan DACA Working Group. The reports addressed five areas:

The DACA reports represent a flexible, market-oriented agenda from dozens of experts that, if implemented, would spur innovation, encourage competition, and benefit consumers. The regulatory framework report is the centerpiece recommendation and adopts a proposal largely based on the Federal Trade Commission Act, which provides a reformed FCC with nearly a century of common law for guidance. Significantly, the reports replace the FCC’s misused “public interest” standard with the general “unfair competition standard” from the FTC Act.

Despite the passage of time, those reports have held up remarkably well. The 2011 Mercatus paper describing the DACA reports is attached for submission in the record. The scholars at Mercatus are happy to discuss this paper and the cited materials below—including the DACA reports—further with Energy & Commerce Committee staff as they draft white papers and reform proposals.

Thank you for initiating discussion about updating the Communications Act. Reform can give America’s innovative technology and telecommunications sector a predictable and technology-neutral legal framework. When Congress replaces command-and-control rules with market forces, consumers will be the primary beneficiaries.

Sincerely,

Brent Skorup
Research Fellow, Technology Policy Program
Mercatus Center at George Mason University

On its face, Verizon won a resounding victory in Verizon v. FCC since the controversial net neutrality regulations were vacated by all three DC Circuit judges. This marks the second time in four years the FCC had its net neutrality enforcement struck down.

Look at published reactions, though, and you’ll see that both sides feel they suffered a damaging loss in yesterday’s decision.

Most analysis of the case will point out that it’s a mixed bag for both sides. What is clear is that the net neutrality movement suffered an almost complete loss in the short term. The FCC’s regulations from the Open Internet Order preventing ISPs from “unreasonable discrimination” and “blocking” of Internet traffic were struck down. The court said those prohibitions are equivalent to common carrier obligations. Since ISPs are not common carriers–per previous FCC rulings–most of the Open Internet Order was vacated.

The long term is more uncertain and net neutrality critics have ample reason to be concerned. The court yesterday said the FCC has broad authority to regulate ISPs’ treatment of traffic under Section 706 of the 1996 Telecommunications Act. This somewhat unanticipated conclusion–given its breadth–leaves the FCC with several options if it wants to enact net neutrality or “net neutrality-lite” regulations.

Putting aside the possibility that the FCC or Verizon will appeal the decision, these are the developments to watch:

1. Title II reclassification.

The FCC could always reclassify ISPs as common carriers and subject them to common carrier obligations. I think this is unlikely for several reasons.

First, reclassification would absolutely poison relationships with Congressional Republicans, some important Democrats, and the broadband industry. This is a large reason why then-FCC Chairman Genachowski did not seriously pursue reclassification in 2010. If anything, the political climate is worse for reclassification. Republicans and ISPs simply oppose reclassification more than Democrats and advocates support it.

Second, the content companies–like Google, Hulu, and Netflix–who would ostensibly benefit from net neutrality seem to have cooled to the idea. Part of content companies’ waning interest in net neutrality, I suspect, is exhaustion. This fight has gone on for a decade with little to show for it. They may also realize that ISPs are not likely to engage in truly abusive behaviors. Broadband speeds and capacity have advanced substantially in a decade and concerns about being squeezed out have lessened. There are also powerful norms that ISPs are not likely to violate. Consumers don’t like unseemly behavior by ISPs–like throttling a competing VoIP or video provider. If only because of the PR risk, ISPs have significant incentives to maintain the level of service they have historically provided.

Third, reclassification is a time-consuming and legally fraught process. Even the most principled net neutrality proponents don’t want ISPs subjected to every applicable Title II obligation. But “forbearance” of Title II regulations means several regulatory proceedings, each one potentially subject to litigation.

Finally, Chairman Tom Wheeler, fortunately, does not appear to be an ideologue willing to spend most of his tenure as chairman re-fighting this bitter fight. His comments last month were telling:

I think we’re also going to see a two-sided market where Netflix might say, ‘well, I’ll pay in order to make sure that . . . my subscriber receives, the best possible transmission of this movie.’ I think we want to let those kinds of things evolve.

This statement struck dread in the hearts of many net neutrality proponents. I’ve always believed he was talking about specialized services when he made this statement since pay-for-priority deals were essentially banned by the Open Internet Order. Regardless, his apparent comfort with changing pricing dynamics in two-sided markets indicates he is not a net neutrality partisan. I suspect Chairman Wheeler wants to go down as the chairman who guided America to a mobile future. His priorities seem to be in getting spectrum auctions right, not in rehashing old battles.

2. Pay-for-priority deals.

The legal uncertainties need to be settled before ISPs begin looking at prioritization deals, but they’ll probably pursue some. For example, gaming services might want to pay ISPs to make sure gamers receive low latency connections and large enterprise customers might want prioritized traffic for services like virtual desktops for, say, on-the-road employees. No one knows how common these deals will be. In any case, these deals will probably be closely monitored by the FCC for perceived abuses of market power, as explained next.

3. Increased FCC scrutiny using Section 706.

Substantial and costly scrutiny of ISPs’ traffic management from the FCC is the long-term fear. It now appears that the FCC has many tools to regulate how ISPs treat traffic under Section 706. I call this net neutrality-lite but 706 authority has the potential to be a more powerful weapon than the Open Internet Order. Not only can the FCC use 706 to regulate ISPs through adjudications, the mere threat of using 706 against ISPs may induce compliance. If there is a bright side to the court’s recognition of the FCC’s 706 authority, it’s that it makes Title II reclassification of ISPs less likely.

Verizon v. FCC was mostly a win for those of us who viewed the Open Internet Order as a regulatory overreach. Risks remain since net neutrality as a policy goal will not die, but reclassification is a long shot, fortunately. Policy watchers will be analyzing Wheeler’s actions, in particular, to see whether the FCC pursues its Section 706 authority to regulate ISPs. Hopefully the court’s decision is accepted as final and marks the end of the most heated battles over net neutrality. The FCC could then turn its attention to important issues like spectrum auctions, the IP transition, and the rapidly changing television market.

It’s encouraging to see more congressional movement in repurposing federal spectrum for commercial use. This week, a bill rewarding federal agencies for ending or moving their wireless operations passed a House committee. The bipartisan Federal Spectrum Incentive Act of 2013 allows agencies to benefit when they voluntarily give up their spectrum for FCC auction.

In the past, an agency could receive a portion of auction proceeds but only to compensate the agency for relocating its systems. Agencies complained, sensibly, that this arrangement does little to encourage them to give up spectrum. Federal agencies had to go through the hassle of modifying their wireless equipment and sharing spectrum with another agency but were left no better off than before. In some cases, the complications with sharing spectrum made them worse off, so there was risk of downside and no upside.

This House bill provides that an agency can keep 1% of auction proceeds in addition to relocation costs. With this additional carrot, the hope is, agencies will be more willing to modify their equipment and make room for mobile broadband carriers.

The bill is a good start but I think it’s a little too restrictive. A one percent claim on auction receipts seems insufficient to induce dramatically improved agency participation. Given how poorly federal agencies use spectrum, Congress should be doing much more to force agencies to justify their spectrum usage. Additionally, how agencies can use that 1% benefit seems too limited. The bill allows the funds to be used 1) to offset sequestration cuts, and 2) to compensate other agencies if they agree to share spectrum. Some journalists are reporting that agencies can use the funds to expand existing programs but I don’t see that language in the proposed bill. It wouldn’t be a bad idea, though, to have fewer restrictions on the payments since it would likely increase agency participation.

Call it what you want: a bailout, a thumb on the scales, bidder restrictions–the FCC might conspicuously intervene in the 2015 incentive auctions at the behest of smaller carriers and public interest advocates.

Chairman Wheeler’s recent comments indicate the FCC may devise a way to prevent the largest two carriers–AT&T and Verizon–from purchasing “too much” of the television broadcasters’ spectrum at auction. AT&T likely sees the writing on the wall and argues that if there are auction limits, the restrictions should apply only to the auction, rather than more extreme restrictions that would penalize AT&T and Verizon, the largest carriers, for previously-acquired spectrum. As The Switch’s Brian Fung put it,

the small carriers favor what are called “asymmetric” spectrum caps that affect various carriers differently, while opponents prefer “symmetric” caps that don’t account for existing market positions.

While I wish AT&T put up more of a fight to auction interventions, they (and staff at the FCC) are handicapped in pursuing an unrestricted auction. The blame lies mostly with Congress who gave the FCC vague (thus ripe for abuse) and conflicting mandates spanning decades. The 1993 law authorizing auctions, for instance, requires the FCC to “avoid[] excessive concentration of licenses” and to “disseminat[e] licenses among a wide variety of applicants” among other regulatory carve-outs for smaller competitors. These latter requirements, if implemented as rigorously as smaller carriers would like, directly undermine the purpose of the 2012 American Taxpayer Relief Act that requires the upcoming spectrum auctions raise $7 billion for a public safety broadband network and $20 billion for deficit reduction.

By asymmetrically penalizing AT&T and Verizon, the FCC increases the probability the auction fails to raise the tens of billions of dollars needed (see Fred Campbell’s recent paper). I haven’t heard a policymaker speak about the incentive auction without remarking how extraordinarily complex it is. That complexity–as was made clear in this week’s Senate hearing on the subject–means no one knows how much spectrum will be auctioned off or how much money will be raised. I was doubtful the FCC would secure the called-for 120 MHz for auction in the first place, but the Senate hearing convinced me that they might not get even 60 MHz. If the FCC meddles too much and the broadcasters aren’t assured they’ll get top dollar for their spectrum, the broadcasters might not show up to sell.

For many reasons, the FCC should ignore the pressures to restrict the large carriers in bidding. Smaller carriers argue the large carriers will outbid them only to preclude competition and hoard the spectrum. Every major carrier is spending billions to expand its footprint and capacity rapidly so the hoarding argument is hard to accept (not to mention, carriers face FCC build out requirements). The hoarding argument also confounds me because AT&T and Verizon are at the forefront arguing for more spectrum auctions, particularly spectrum from federal agencies. Would they want the market flooded with new spectrum only so they could spend billions to hoard it?

Asymmetric auction restrictions also resemble a bailout for smaller carriers. T-Mobile and Sprint–who most actively lobby for auction restrictions–are not mom-and-pop establishments. Each is a sophisticated, powerful corporation with access to capital markets and backed by larger international telecoms–Germany’s Deutsche Telekom for T-Mobile and Japan’s SoftBank for Sprint. DT and SoftBank have both pledged to spend billions in the next few years to improve their American carrier’s competitive position. Such carriers do not need an FCC handout.

The bailout resemblance is more apparent when you realize Sprint has been hamstrung for nearly a decade with damaging business decisions. Three come immediately to mind: 1) the dreadful merger with Nextel in 2005; 2) the ill-fated bet in 2008 to forgo LTE rollout in favor of WiMax, a competing 4G standard; and 3) the loss of over one million customers when it discontinued its push-to-talk iDEN service for network upgrades. The losses from the Nextel merger alone approach $30 billion.

To be clear, I don’t second-guess Sprint’s decisions. They did what innovative firms are supposed to do in attempting big, risky investments. However, it should not be the job of the FCC to favor some firms through spectrum auctions because some carriers’ business decisions did not pan out. That is not a competitive wireless auction–that is an FCC-orchestrated bailout. Granted, the FCC has been handed conflicting mandates. The Commission has ample discretion, however, to conduct a competitive auction that both complies with the law and improves chances of reaching the ambitious revenue goals. Intense meddling with auction results could prove disastrous.

There is bipartisan agreement that the 1996 Telecom Act was antiquated only shortly after President Clinton’s signature had dried on the legislation. There is also consensus that spectrum policy, still largely grounded in the 1934 communications statute, absolutely distorts today’s wireless markets. And there is frequent criticism from thought leaders, right and left, that the FCC has been, for decades, too accommodating to the firms it regulates and too beholden to the status quo (economist Thomas Hazlett quips the agency’s initials stand for “Forever Captured by Corporations”).

For these reasons, members of Congress every few years announce their intention to reform the 1934 and 1996 communications laws and modernize the FCC. Yesterday, some powerful House members unexpectedly reignited hopes that Congress would overhaul our telecom, broadband, and video laws. In a Google Hangout (!), Reps. Fred Upton and Greg Walden said they wanted to take on the ambitious task of passing a new law in 2015.

Much depends on next year’s elections and the composition of Congress, but hopefully the announcement spurs a major re-write that eliminates regulatory distortions in communications, much as airlines and transportation were deregulated in the 1970s–an effort led by reformist Democrats.

About ten years ago, more than fifty scholars and technologists crafted reports which constituted the Digital Age Communications Act (or DACA) that is largely deregulatory (a majority of the group had served in Democratic administrations, interestingly enough). In 2005, then-Sen. Jim DeMint proposed a bill similar to the working group’s proposals. The working group’s recommendations aged very well in eight years–which you can’t say about the 1996 Act–and represents a great starting point for future legislation.

As Adam has said the DACA reports have five primary reform objectives:

– Replacing the amorphous “public interest” standard with a consumer welfare standard, which is more well-established in field of antitrust law

– Eliminate regulatory silos and level the playing field through deregulation

– Comprehensively reform spectrum not just through more auctioning but through clear property rights

– Reform universal service by either voucherizing it or devolving it to the States and let them run their own telecom welfare programs; and

– Significantly reforming & downsizing the scope of the FCC’s power of the modern information economy

DACA redefines the FCC as a specialized competition agency for the communications sector. The FCC largely sees itself as a competition agency today but the current statutes don’t represent that gradual change in purpose. The FCC is slow, arbitrary, Balkanizes industries artificially, and attempts to regulate in areas it isn’t equipped to regulate–the agency has a notoriously bad record in federal courts. These characteristics create a poor environment for substantial investments in technology and communications infrastructure. The DACA proposals aren’t perfect but it is a resilient framework that minimizes the effect of special interests in communications and encourages investments that improve consumers’ lives.

Both parties of Congress has been increasingly critical of federal agencies’ inefficient use of spectrum in the past few years and it seems like agencies are getting the message. The NTIA, which is the official manager of federal agency spectrum, released a letter yesterday announcing that the Department of Defense would be relocating some of its systems. Defense had reached an agreement with broadcasters that Defense systems will share spectrum in the Broadcast Auxiliary Service (BAS) band.

The soon-to-be vacated band held by Defense will eventually be auctioned off–hopefully in 2014–for billions of dollars and likely used for mobile broadband provided by wireless carriers like AT&T, Verizon, Sprint, and T-Mobile. These carriers face serious congestion problems because of government-created scarcity of spectrum.

The carriers actually had targeted some of BAS spectrum because they weren’t convinced Defense would be willing to move their systems. The broadcaster deal reached with Defense means everyone’s apparently happy–the broadcasters can keep their BAS spectrum, the feds get new equipment and Congress off their back (temporarily), and the carriers get new spectrum for auction.

The deal is welcome news because the spectrum will be put to a higher-valued use once auctioned. The federal government pays almost nothing for its own spectrum and is a poor steward of the resource. Transferring spectrum from agencies to carriers means lower phone bills and more mobile broadband coverage. Government agencies are notoriously resistant to moving their systems or sharing with others, so entering into a sharing pact with the broadcasters indicates some of the resistance is thawing.

It’s not unequivocal good news, though.

The government is clearing out from a 25 MHz band of spectrum and occupying the larger, 85 MHz BAS band that will be shared with broadcasters. The military will need a larger band because sharing imposes some capacity constraints necessitating new, agile systems that search the airwaves to make sure they don’t interfere with existing broadcast users. Dynamic sharing like this only adds to the cost and complexity and may imperil next years’ planned auction.

Further, the BAS band is unavailable for auction only because of the antiquated command-and-control regime the FCC uses to award spectrum licenses. BAS is mostly used for electronic news gathering, which relays local and national newscasts from reporters on the scene to broadcast studios. Broadcasters have used BAS spectrum since the 1960s when it was allocated to them for free.

In a market, broadcasters likely would not have as much BAS spectrum as they currently have. In fact, because of technology changes and squeezed newsroom budgets, broadcasters are finding cheaper alternatives. Increasingly, journalists are using carriers’ LTE technology to transmit their breaking newscasts since the technology costs a fraction of the cost of news vans and equipment needed for BAS transmissions. That is to say, there are alternative business models in the absence of Soviet-style allocations.

So despite these industry changes, BAS spectrum cannot be auctioned for its highest-valued use (probably mobile broadband) under current FCC rules. Further, it will be even more difficult to bring the benefits of auctions to the airwaves if federal users are intermingling with existing users, broadcasters in this case. It’s a trend to be wary of. Let’s just hope that next year’s planned auctions occur on time so that more consumers can benefit from mobile broadband.